I mean sure, to an extent Steam Boxen will be competing with consoles (which are generally expected to be locked down), but their main competition, the one everyone is going to compare them to, is a custom built PC. If they cripple their platform in any substantial way, they are going to end up screwing their chances of it gaining traction.

I don't think Valve is competing against custom built pc. Rather they are creating a platform where people can either go with a custom built pc or a pre-configured pc. SteamOS is not about making another competition in the industry but rather destroy the concept of competing hardware/console. Their main focus is the Steam store which is the platform they will use to generate revenue. The Steam Boxes themselves and the controller may yield small profits but the main attraction is the platform itself. If anything, this looks like Valve is employing a Blue Ocean strategy as they call it in Business.